More Musings on Geithner Plan

There have been plenty of takedowns on the plan (Leo provides a good recap in an earlier post tonight). Nevertheless, I thought I’d add a few further thoughts

Aside from being busy, I didn’t weigh in because I don’t see that much has changed (obviously, Mr. Stock Market disagrees vehemently, but bonds didn’t move much today).

Yes, we have numbers now. and we now know how the program for loans differs from the program for securities. Clusterstock is of the view the complexity is deliberate, to confuse the chump taxpayer. Agreed completely.

For loans, the structure is clearly an option for the investor. The fact that the authorities are pretending that options are priced the same as cash bids is, as usual, another way to fleece the taxpayer (ie, somehow pretending that the auction bids are reflective of cash market values. Consider out of the money options).

The fund managers for the purchase of the securities appear to have more skin in the game (max 3 to one gov;t funds, versus 12 to one with the loans), except the fund managers…..are running other people’s money! The managers themselves get fees, so they do fine. The question is whether they can stump up enough money for this adventure.

Nevertheless, this is still quite a way from being operational. The fund managers won’t be approved until May 1 (perhaps earlier, but from the MLEC, approving managers takes time, so I’d be surprised if they could accelerate this by more than a couple of weeks). Even if they have been soliciting investors, I would think it would take a minimum of a month beyond that to have a first closing (reader sanity check here?) So the funds aren’t operational until June. Meanwhile, if you believe Leon Black of Apollo, the commercial real estate market is about to hit the skids in a very serious way, Investors might not be so keen to stump up until all the related shoes have dropped.

I did not see anything in the loan program press release re timetable, but that may have been discussed elsehwhere.

Despite the market reaction as if this were detailed, in fact, for every detail presented today, about ten more have to be worked out. And while the discussion of details on the loan program did mention that collusion between investors was a no-no, I don’t see any language anywhere to suggest that the powers that be are aware of the potential to game this program between investors and banks. Creative readers have come up with lots of nefarious ideas.

And we still have the $64,000 question: will all these subsidies lead to high enough bids to reach the value at which banks are carrying this dreck on their books? Banks have been consistently unwilling to take losses if they can still keep the paper on their books at fictive values. And in a very big disincentive to participating, the FASB is on its way to weakening mark to market accounting. That may not affect as many assets as one might imagine, but it still around the margin will have an impact.

And then we have the dishonesty and questionable legality. Geithner in his speech today presented the alternatives to his plan as having the government buy the assets and risk overpaying, or letting the banks sit with the nuclear waste. Um, what about putting them into receivership?

Felix Salmon notes out that failure of the plan to get much in the way of bids would make matters worse, by revealing the banks really hold such dreadful garbage that even a super subsidized program won’t clear out the dreck. And that, as the Financial Times points out, has pretty serious implications for Obama. Does he realize that he is politically all in on this one, that if the program fails, he is figuratively, and literally (as far as banks are concerned) cashed out?

And then we have questionable legality. One has to wonder if the use of the peculiar auction mechanism and the extreme measures used to draw in not very large in the scheme of things amount of private capital is to create the fiction that the assets are fairly priced, hence the loans from the FDIC and Fed adequately collateralized. My understanding is that a loan in excess of asset value is a grant or gift, and the Fed and FDIC are not authorized to enter into that sort of arrangement.

And we have a final thought, via e-mail, from former bank regulator William Black:

The media appears to have missed the significance of two passages from his Monday press conference where Geithner indicates most explicitly his intention to violate the Prompt Corrective Action law for favored insured institutions. It appears that he intends to keep (favored) insolvent banks under the control of the managers that caused their failure. (And this comes from someone that purports to fear moral hazard!) Of course, the entire asset disposition plan violates the Prompt Corrective Action law, which requires least cost resolution, but that is a more subtle point. You see, insolvent banks, will have “capital” supplied in unlimited amounts by the taxpayers! Only favored failed financial institutions will be bailed out so it will pay to be an FOG (friend of Geithner). The Prompt Corrective Action Act had the quaint notion that we should be a government of laws and outlawed this kind of favoritism.

The germane passage from the press conference:

But the critical part of that program is to make it clear that they will be able to raise capital from the government if they can’t raise in the markets so that they can get through a deeper recession. That will help reduce the odds of a deeper recession, help make sure, again, they can provide a level of lending that will be necessary to support recovery.

And a program of insurance — you could call it capital insurance for the banking system so that banks have the cushion of capital necessary to lend and expand even if the economy goes through a broader — a deeper recession.

I called the TARP an example of Mussolini-style corpocracy. Has anything changed in the last six months?

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  1. Steve

    Congress will have to vote massive funding to FDIC and amend several statutes before this plan can get off the ground. That alone will be good for a few months of entertainment. I expect the same see-saw as with the TARP last Fall.

  2. IF

    I stumbled upon this: “Step Backward 1: The fees paid back to the investor will be the standard 2% per annum. These fees allow the investor to amortize it’s investment in the fund over four years. This is an old Wall Street trick. You earn your equity position, you do not pay for it.”

    Is this some misunderstanding? (I haven’t read the proposal.) What do I need to do to put my snout into the money trough?

  3. alex black

    “Has anything changed in the last 6 months?”

    Aside from the new Treasury Secretary having a strange, pointy nose, not really.

    Instead of many of us complaining about what a blatant giveaway this is for the subsidized investors, why don’t we start a little hedge fund, and BE investors? Either we make some money, or we get told that “this is only being offered to a select few” and then we sue the hell out of them for collusion. I’m in.

  4. williambanzai7

    (Fidelity Fiduciary Bank, Mary Poppins)

    Sing along link:

    Father, these are private equity investors….

    If you invest your tuppence
    Wisely in Geithner’s public/private toxic asset tank
    Safe and sound?
    Soon that tuppence,
    Safely invested in the toxic asset tank,
    Might compound!

    And you’ll achieve that sense of conquest
    As the Fed’s non-recourse loans expand
    In the hands of the private asset managers
    Who invest as propriety demands

    You see, you’ll be part of
    McMansions in the Nevada desert
    Toxic assets from Detroit to Fresno
    Fleets of repossessed trailer parks
    Majestic negative-amortizing Miami coops
    Plantations of ripening securitised sub-prime….

    All from tuppence, prudently
    Fruitfully, frugally invested
    In the, to be specific,
    Geithner’s Federal
    Financial Stability
    Public Private
    Toxic Asset Tank!

    When you co-invest your tuppence in the Feds toxic asset tank
    Soon you’ll see
    That it blooms into equity returns of a generous amount
    And you’ll achieve that sense of stature
    As your NAV expands
    To the high financial strata
    That established private equity now commands

    You can indirectly purchase first and second home equity loans
    Think of the foreclosures!
    Mortgages! CLOs! CDOs, synthetic CDOs!
    Bankruptcies! Debtor sales!

    All manner of public/private enterprise!
    Auctioned ALT A! Subprime!
    Collateralized schlock! SPVs!
    Distressed SIVs! Amalgamations! Bad banks!

    You see,
    Tuppence, patiently, cautiously trustingly invested
    In the, to be specific,
    Tim Geithner’s
    Federal Financial Stability
    Public Private
    Toxic Asset Tank!

    Welcome to our joyful family of private investors!!!!!!

  5. fresno dan

    ‘…is to create the fiction that the assets are fairly priced, hence the loans from the FDIC and Fed adequately collateralized.”
    It doesn’t seem to be discussed much, but isn’t the contortions the gubermint going through going to run smack dab into the various accounting, banking, and IRS rules?
    Everybody’s equal, but some are more equal than others.

  6. killben

    Forgetting for a moment that this is just another way of sticking it up the tax-payers,

    I have only 2 question …

    is the quantum of toxic assets so low that FDIC and Treasury can fund it easily?

    if the funds required is very high, will it not lead to more money printing and collapse of the dollar?

  7. Anonymous

    Yves: And then we have questionable legality. One has to wonder if the use of the peculiar auction mechanism and the extreme measures used to draw in not very large in the scheme of things amount of private capital is to create the fiction that the assets are fairly priced, hence the loans from the FDIC and Fed adequately collateralized. My understanding is that a loan in excess of asset value is a grant or gift, and the Fed and FDIC are not authorized to enter into that sort of arrangement.


    Absent Congress modifying the laws, there is also an illegal gift by the Fed and FDIC if the buyers are bank bondholders, and the bank bondholders make radically inflated bids in exchange for Geithner’s commitment that bank bonds won’t be haircut. After all, the bank bondholders may be better off losing 3% of their PIP investment than 30% of their bank bond investment.

    Congress should throw a massive tantrum if Geithner, Bernanke, and Bair don’t seek legislation to make Geithner’s plan legal.

  8. Bendal

    Doesn’t this plan set the US Government up in the same position as what AIG was doing? AIG sold insurance on risky credit swaps to guarantee a certain price; doesn’t this plan do the same thing with the US taxpayers now filling the role of AIG?

  9. carol7

    at Killben: ¨…is the quantum of toxic assets so low that FDIC and Treasury can fund it easily?¨

    I read estimates of $ 2 – 4 T required (as a minimum).
    But in addition to the toxic — oh, pardon me: ´legacy´ — assets, there are the liabilities, e.g. AIG still has $ 1.6 T CDS. E.g. AIG has to pay $ 0.5 T if certain interest rates increase 100 bp. All these bets will either kill the banks — oh, make that the US taxpayers — or should be declared null and void as per direct. Or preferably as per 1 Sept. 2008 (RICO claw back). Now we have the horrible situation that e.g. the John Paulson hedge fund, by paying $ 22 million on a bet Lehman would fail, has won $ 1 T at the taxpayers´ expense.

    A question: I read the press releases of the Treasury and it is not clear to me whether foreign banks are allowed in. Given that some 2/3 of the US-subprime-mess has been sold to European banks, they might like to get in.

  10. Anonymous

    There is an old saying, never run an error….why ? because it invariably becomes worse.

    This situation is the mother of all errors and once the mkt knows you are in trouble it never helps.

    None of these fools seem to realise that the Stock mkt is the public and when the public realise that this plan shafts them yet again they will leave the stock mkt in droves….Which will in turn make the real economy even worse, which will make all these toxic assets even less valuable.

  11. Green Mounster

    Now, I am about to do my taxes, on which I will owe some money to the Feds. Other than avoiding the draconian penalties the IRS would impose on me, a lowly, middle class taxpayer, can anyone advise me why else I would want to voluntarily pay them? It seems that the public has little opportunity to express their outrage over this kleptocracy or, as Yves writes, “Mussolini-style corpocracy”. Letters, emails and phone calls to our Members of Congress seem to have little effect. The ballot box? Fuhgettaboutit! The national Dems are so over-identified with the financial wizards of Wall Street and their campaign cash that they appear to be Gingrich Republicans in drag. A peaceable friend, a Quaker, told me a few years ago, “Soon, we will have three kinds of people: the super-rich, everyone else and the armed guards that keep them apart.” Sadly, we are already there.

  12. Dan Duncan

    Investopedia defines Liar Loan:

    These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business. These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage.

    Now Investopedia needs to define Liar Lent:

    These government sponsored programs are designed for lenders who have a hard time producing income and asset verifying documents, or who have untraditional assets on their books, such as Level III. These programs are called “Liar Lent” because the MLEC and TARP features open the door for abuse when the lender, investor and their government sponsor overstate income and/or assets in order to dupe the unwitting taxpayer into funding these incestuous TARP transactions that will have the “arms length” of Siamese Twins…on their connected side.

  13. Young Economist

    Geithner’s plan is siphoning plan

    Geithner’s plan is worse than Pualson’s plan because the plan will definitely cause over-pricing assets purchase and also cause the siphoning from taxpayers’ money into banks and Wall street investors, definitely worse than Madoff ponzi scheme. Why? We are allowed the assets sellers-Wall street investors (Banks, Hedge funds and all kinds of funds) can join in the program to buy assets. They can be both buyers and sellers and they can set up groups of buyers to bid the assets at the over-price and the loss will come to taxpayers’ money. For example, the intrinsic value of asset at 100 dollars but the sellers and buyers are the same Wall Street investors such as CITIGROUP, JP Morgan of BofA. They definitely want to buy like 150 dollars meaning they will gain 43 dollars (gain from assets sales at 50 dollars but loss from private capital investment at 7 dollars) but the tax payers’ money will lose 43 dollars from the public capital at 7 dollars and the FDIC guaranteed bonds at 36 dollars. Therefore, Geithner’s plan is siphoning plan from taxpayers’ money into the banks and Wall Street investors. If the total plan is 1 trillion dollars, we could expect the loss up to 300-400 billion dollars if they allow Wall street investors to join buying at 40-50 % over intrinsic value. Therefore, we should reduce conflict of interest by not allowing the sellers or the investors who are holding the assets to join buying assets in the program.

    Why depression occur from government’s reckless intervention

    Another point I would like to explain why the economic situation is getting worse to depression if the policy makers transfer the loss from the private investors to taxpayers or we call it as the severe cost of intervention. We have to understand that the private investors/speculators hold the risky assets under risk management plan that they can get loss from investing; however, the taxpayers do not have the plan or risk management for the loss on investment. Therefore, when the government intervene the market and get loss (we are definitely facing the increasing loss of FED and FDIC and we could expect to see more under reckless Geithner’s plan), it is like money transfer from private investors into taxpayers and taxpayers will have to compensate the loss by higher taxes and higher cost of living such as the higher inflation or higher cost of fund such as the higher long-term government bond yield. I think the worst case scenario is not recession with deflated price but the depression with hyperinflation because there will be the wealth destruction to consumers and taxpayers not free lunch private investors or producers. I think every country face the same problem; all the loss going to taxpayers but all the gain going to investors and producers and this is the real crisis of economic sustainability and the huge burden to the next generation.

  14. mft

    According to Steve @4:14 “Congress will have to vote massive funding to FDIC and amend several statutes before this plan can get off the ground.”

    I want to know whether this is true, it obviously makes a big difference. Could someone who knows please comment?

  15. JLR

    I’m with Alex Black. If we (US taxpayers) are going to be the primary investors in these things, I want the chance to look over the assets and bid.

    Put the assets up on websites, allow the formation of investor groups, and let us have a look.


  16. Delicious

    I called the TARP an example of Mussolini-style corpocracy. Has anything changed in the last six months?

    I am reminded of Norman Mailer’s 2003 speech:

    Real democracy comes out of many subtle individual human battles that are fought over decades and finally over centuries, battles that succeed in building traditions. The only defenses of democracy, finally, are the traditions of democracy. When you start ignoring those values, you are playing with a noble and delicate structure…

    Because democracy is noble, it is always endangered. Nobility, indeed, is always in danger. Democracy is perishable. I think the natural government for most people, given the uglier depths of human nature, is fascism. Fascism is more of a natural state than democracy.

    Or as the Onion once said, “Americans shrug, line up for fingerprinting.”

  17. carol

    to mft at 9:57 am:

    The law is already in the making, by none-other than remove-the-restriction-of-bonuses-to-failing-companies-on-taxpayers-lifesupport- Senator Chriss Dodd himself.

    $ 0.5 T = $ 500 billion for the FDIC


    and also from
    In a very aptly named bill, Chris Dodd proposes a massive overhaul to the capitalization of the FDIC, so much so that it would make the limitations on the widely criticized TARP seem like child’s play (with all the staged bellyaching in both Senate and Congress of how banks will not get even a penny more in bailout funding). Dodd, cunningly, is proposing adjustments to Treasury borrowing limit by the FDIC under the pretext that it will benefit depositors, when in actuality it is only bank holding companies and further TLGP issuers that will be the sole beneficiaries of this bill. The DPA 2009 effectively increases the implicit bailout capital available to banks by up to half a trillion!
    end quote

  18. Anonymous

    If there are few bids, how can Obama literally “be cashed out”? Few bids would mean proportionally less outlay. In a sense this would be for the best as Obama could then say no other option is left but FDIC receivership. It doesn’t matter if he is politically “cashed out” at that point since he doesn’t need approval from Congress to let FDIC do its job.

  19. MyLessThanPrimeBeef

    IF @ 4:21AM, that sounds almost like zero percent down purchase, proving once again the world is cyclical.

  20. Anonymous

    We need a slogan that we can rally common intersts around to stop the financial fascism that this is. It needs to be something that the financially ignorant can understand and resonate with.

    I am ready to make the protest sign and protest.

    We need more than textual white noise if we are going to stop this.


  21. MyLessThanPrimeBeef

    Psychohistorian, I’m pretty ignorant myself, so how about

    Down with Serial Bubblers!!!!

    Do I have ‘change’ for $650 million!!!!!

    Taxpayers are dummies! Really!

    I rather be home watching reality TV than out on the street protesting!!!

    Give me my corporate welfare checks or give me financial death!!!

    Officer, I want to report a bank robbery. I was just robbed by my bank!!!

  22. Eric L. Prentis

    Geithner’s modified Paulson plan to use taxpayer money to purchase bank toxic assets at above market prices, which the Democrats and especially President Obama should be deeply ashamed and mortified for supporting, does zero to help the US economy and just transfers federal money to politically favored recipients. Obama/Geithner’s bailout plan is a money grab, pure and simple. The banks have not and will not lend into a severe recession, it is not profitable. Nothing will change after the financial elite loots taxpayer’s money except Wall Street bankers will unfairly have the money that they rightfully lost leading up to the world recession that they caused. Geithner/Summers/Bernanke couldn’t be bigger toadies working for the money changers and against the common good.

    The Obama administration’s solution of piling more and more debt on the problem will eventually make the recession much worse, instead, we need debt forgiveness paid for the directors, executives, stockholders and bondholders of insolvent institutions which have to go into receivership and then be reorganized. Any other course condemns those who are politically out of favor to a decade, or more, of misery.

  23. Richard Kline

    Yves: “I called the TARP an example of Mussolini-style corpocracy. Has anything changed in the last six months?”

    Yes: The numbers have gotten bigger, the thievery more naked, the fantasies more delusional, and the process more intrinsically corrupt (though how anything could be more than ‘total’ is a difficult semantic exercise to conceive).

    . . . ‘ourgiv’ says word verification. Judging by the context from the post, I suspect that that is pronouced ‘whoregov.’

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